Hard Money Loans: When to Use Them, What They Cost, and How to Get One

A hard money loan is a short-term, asset-based loan secured by real property. Unlike a [conventional mortgage](/blog/conventional-loan-requirements) where the lender cares primarily about your income, credit score, and debt-to-income ratio, a hard money lender cares primarily about the property itself—specifically, what it's worth after repairs.

Hard money loans fund in days, not months. They cost significantly more than bank loans. And for certain real estate strategies, they're the single best financing tool available.

This guide covers exactly when hard money makes sense, what it costs, and how to avoid the mistakes that sink new investors.

What Is a Hard Money Loan?

A hard money loan is a short-term real estate loan (typically 6–18 months) issued by a private lending company or individual investor. The loan is "hard" because it's secured by a hard asset—the property.

Key characteristics:

• Loan-to-value (LTV): 60–75% of current value, or 65–80% of after-repair value (ARV)
• Interest rates: 10–15% annually (2025–2026 market)
• Points (origination fees): 2–5 points (each point = 1% of the loan amount)
• Term: 6–18 months, with possible extensions
• Funding speed: 3–10 business days
• Prepayment penalties: Usually none or minimal

Hard money is not designed to be held long-term. It's a bridge—you use it to acquire and renovate a property, then you either sell the property or refinance into permanent financing.

How Hard Money Loans Work

The Application Process

1. Submit the deal. The lender wants to see the property address, purchase price, estimated rehab budget, and your ARV estimate. Most lenders have an online submission form.
2. Property evaluation. The lender orders a BPO (broker price opinion) or appraisal. Some lenders do drive-by evaluations. Turnaround: 1–5 days.
3. Underwriting. The lender reviews the deal numbers, your experience, and your exit strategy. Light credit check (most lenders want 600+ FICO, but some go lower).
4. Term sheet. You receive a summary of loan terms: rate, points, LTV, term, draw schedule for rehab funds.
5. Closing. Title search, insurance binding, and closing—typically handled by a title company. 3–7 days from term sheet to funding.

The Draw Process for Rehab Funds

Most hard money lenders don't hand you the full rehab budget at closing. Instead, they use a draw system:

1. You complete a phase of work (demolition, framing, plumbing, etc.)
2. You submit a draw request with photos and invoices
3. The lender sends an inspector to verify the work
4. The lender releases funds for that phase (usually within 2–5 business days)

Some lenders hold back 10% of each draw as retainage until the project is complete.

What Hard Money Actually Costs

Let's walk through a real example to show the true cost:

The deal:

• Purchase price: $180,000
• Rehab budget: $45,000
• ARV: $290,000
• Loan amount: $180,000 (100% of purchase, rehab funded separately through draws)

Hard money terms:

• Rate: 12% annual
• Points: 3 (= $5,400)
• Term: 12 months
• Monthly interest payment: $1,800
• Inspection fees: $150 × 4 draws = $600
• Total interest (assuming 8-month hold): $14,400
• Total cost of capital: $5,400 + $14,400 + $600 = $20,400

The math still works because the spread between total investment ($180K + $45K + $20.4K = $245,400) and the ARV ($290,000) leaves approximately $44,600 in gross profit before selling costs.

If you held the same property with a conventional loan, you'd save on interest—but the deal would have closed 45 days later, and a bank won't lend on a property that needs significant rehab.

When Hard Money Makes Sense

1. Fix-and-Flip Projects

This is the bread and butter of hard money lending. You're buying a distressed property, renovating it, and selling it within 6–12 months. Banks don't lend on properties with structural issues, mold, or no working kitchen. Hard money lenders do—because they're lending against the future value.

2. Auction Purchases

Foreclosure auctions, tax sales, and HUD auctions often require proof of funds and fast closing (7–14 days). Hard money is the standard tool.

3. [Bridge Financing](/blog/bridge-loan-guide)

You found a great rental property but need to close before your conventional loan is approved. A hard money loan bridges the gap—you close now and refinance later (the "BRRRR" strategy: Buy, Rehab, Rent, Refinance, Repeat).

4. Properties That Don't Qualify for Conventional Financing

Banks have strict property standards. They won't finance a house with:

• Roof damage
• Active foundation issues
• Missing HVAC, plumbing, or electrical systems
• Environmental hazards
• Unpermitted additions

Hard money lenders will, as long as the numbers work.

5. Speed-Dependent Deals

When a motivated seller needs to close in 7 days, hard money is often the only option. The speed premium is worth paying if the deal is strong enough.

When Hard Money Does NOT Make Sense

• Long-term holds. If you're buying a turnkey rental, use conventional financing. Paying 12% interest on a property you plan to hold for 10 years is financial suicide.
• Thin margins. If your profit spread is under $30,000 on a flip, the hard money costs may eat most of your profit. Run the numbers first.
• Primary residence. Most hard money lenders don't lend on owner-occupied properties due to Dodd-Frank compliance requirements. Those that do face extensive regulatory hurdles.
• No exit strategy. If you can't clearly articulate how you'll pay off the loan (sell or refinance), don't take it.

How to Qualify for a Hard Money Loan

Hard money underwriting focuses on the deal first and the borrower second. But borrowers still matter. Here's what most lenders look at:

The Deal (Primary)

• ARV analysis. Comparable sales supporting your value estimate
• Rehab scope and budget. Detailed line-item budget, not a guess
• Purchase price relative to ARV. Most lenders want total costs (purchase + rehab + closing) under 70–75% of ARV
• Market conditions. Days on market for comparable properties, absorption rate

The Borrower (Secondary)

• Experience. First-time flippers pay higher rates (1–3% more) and face lower LTVs. Lenders love track records.
• Credit score. 620+ is comfortable for most lenders. 580–620 is possible with higher down payments. Below 580 narrows your options significantly.
• Liquidity. Lenders want to see cash reserves beyond the down payment and rehab budget. Typically 3–6 months of interest payments in reserve.
• Entity structure. Most hard money loans are made to LLCs, not individuals. Have your LLC formed and your operating agreement ready.

How to Find a Hard Money Lender

National Lenders

Large operations that lend in multiple states. Examples include Kiavi (formerly LendingHome), [Lima One Capital](/blog/lima-one-capital-dscr-review), RCN Capital, and Fund That Flip. They offer standardized products, online applications, and competitive rates for experienced borrowers.

Pros: Consistent terms, scalable, reliable funding. Cons: Less flexibility on unusual deals, stricter underwriting boxes.

Local/Regional Lenders

Smaller shops that know your market. They often attend local REIA (Real Estate Investors Association) meetings.

Pros: More flexible on deal structure, faster decisions, relationship-based. Cons: May have limited capital, less consistent processes.

Private Individuals

High-net-worth individuals who lend their own money. Often found through networking, REIA meetings, and referrals.

Pros: Most flexible terms, can structure creatively. Cons: Less predictable, may not have funds available when you need them.

What to Compare

When evaluating lenders, create a spreadsheet comparing:

1. Interest rate
2. Points (origination fee)
3. LTV and ARV limits
4. Minimum credit score
5. Draw process and inspection fees
6. Extension policy and fees
7. [Prepayment penalty](/blog/dscr-loan-prepayment-penalty)
8. Time to fund
9. Reviews from other investors
10. Junk fees (processing, underwriting, document prep—these add up)

Common Hard Money Mistakes

1. Underestimating Rehab Costs

The #1 killer of fix-and-flip deals. Your $40,000 rehab becomes $65,000 when you find termite damage behind the walls. Budget a 15–20% contingency on every project.

2. Overestimating ARV

Cherry-picking the highest comp in the neighborhood is a recipe for disaster. Use conservative comps—properties most similar in size, age, condition, and location. Get a licensed appraiser's opinion if you're unsure.

3. Ignoring Holding Costs

Interest payments, insurance, property taxes, utilities, lawn care, and HOA fees don't stop during renovation. A 6-month project that stretches to 10 months adds 4 months of carrying costs—easily $8,000–$12,000 on a $200,000 loan.

4. No Exit Strategy

"I'll figure it out" is not an exit strategy. Before you close, know:

• If flipping: What's your minimum acceptable sale price? How long will it take to sell?
• If refinancing: Have you talked to a conventional lender? Do you meet their seasoning requirements (usually 6–12 months of ownership)?

5. Choosing a Lender on Rate Alone

A lender offering 10% with 5 points and slow draws will cost you more than a lender at 12% with 2 points and fast draws. Total cost of capital matters more than the interest rate.

Hard Money Loan Terms Glossary

• LTV (Loan-to-Value): Loan amount ÷ current property value. A $150,000 loan on a $200,000 property = 75% LTV.
• ARV (After-Repair Value): The estimated market value of the property after all renovations are complete.
• LTARV (Loan-to-ARV): Loan amount ÷ after-repair value. Most lenders cap this at 65–75%.
• Points: Upfront fee charged by the lender. 2 points on a $200,000 loan = $4,000.
• Draw: A disbursement of rehab funds after work is verified complete.
• Extension: Additional time added to the loan term, usually at a cost of 1–2% of the loan balance per extension period.
• [Cross-collateralization](/blog/blanket-mortgage-guide): Using equity in another property to secure the loan on a new property.
• Retainage: A percentage of each draw held back until the project is fully complete.

How to Structure a Hard Money Deal for Maximum Profit

Use the 70% Rule as a Starting Point

Maximum purchase price = (ARV × 70%) – Rehab costs

Example: If ARV is $300,000 and rehab costs are $50,000: $300,000 × 0.70 = $210,000 – $50,000 = $160,000 max purchase price

This leaves 30% of ARV to cover financing costs, selling costs (agent commissions, closing costs), and profit.

Negotiate Points Over Rate

If you're holding the property for 6 months or less, origination points hurt more than a slightly higher rate. On a $200,000 loan held for 6 months:

• 2 points at 13% rate = $4,000 + $13,000 interest = $17,000
• 4 points at 11% rate = $8,000 + $11,000 interest = $19,000

Fewer points wins on short holds.

Get Pre-Approved Before You Need It

Most hard money lenders offer pre-approval or proof-of-funds letters. Having this ready lets you move fast on deals and signals to sellers that you can close.

Frequently Asked Questions

How fast can a hard money loan close?

The fastest lenders close in 3–5 business days. Most close in 7–14 days. This depends on how quickly the title search and appraisal/BPO can be completed.

Do hard money lenders check credit?

Most do a soft or hard pull, but credit is secondary to the deal quality. Minimum scores typically range from 550–650 depending on the lender. Some lenders don't check credit at all but charge higher rates.

Can I get a hard money loan with no money down?

Technically possible but rare. You'd need to bring additional collateral (cross-collateralization) or find a lender willing to lend at a very high LTARV. Most lenders require 10–25% of the purchase price as a down payment.

What happens if I can't repay the hard money loan on time?

Most lenders offer a 3–6 month extension for a fee (typically 1–2 points). If you can't repay or extend, the lender will foreclose on the property. Hard money foreclosures tend to move faster than bank foreclosures because these lenders are experienced and prepared.

Is hard money the same as a bridge loan?

They overlap significantly. "Hard money" usually refers to asset-based loans for fix-and-flip or distressed properties. "Bridge loan" is a broader term that includes short-term financing for any transitional real estate situation, including commercial properties and performing assets. Bridge loans from institutional lenders often have lower rates (8–10%) than hard money (10–15%).

Can I use hard money for rental properties?

Yes, as a short-term acquisition and rehab tool. Buy the property, fix it up, get it rented and stabilized, then refinance into a DSCR ([Debt Service Coverage Ratio](/blog/best-dscr-lenders-2026)) loan or conventional [investment property loan](/blog/dscr-loan-for-single-family). Don't hold a hard money loan on a rental—the interest will destroy your cash flow.

The Bottom Line

Hard money is a power tool, not a crutch. Used correctly on the right deals, it lets you move faster than bank-financed competitors, access properties that don't qualify for conventional loans, and scale a fix-and-flip operation efficiently.

Used incorrectly—on thin deals, with no exit strategy, or held too long—it will eat your profits and potentially your investment.

Know the numbers cold before you borrow. Build relationships with 2–3 lenders so you're never desperate. And always, always have an exit strategy before you close.

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